Africa Blazes a Trail in Mobile Money

Africa Blazes a Trail in Mobile Money

          
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Africa Blazes a Trail in Mobile Money

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    Mobile Financial Services in Africa Today—and Tomorrow

    In general, the market for banking in sub-Saharan Africa has developed slowly. The majority of people in sub-Saharan Africa (as many as three in every four) are still unbanked, meaning that their experience with formal financial institutions is at best very limited. This is understandable in a part of the world where, in many cases, people earn the equivalent of $3 or less a day. Today, sub-Saharan Africa remains one of the world’s least-developed regions economically, with less than a quarter of the purchasing power of people in East Asia and about a tenth of the purchasing power of people in Europe. (See Exhibit 1.)

    exhibit

    Partly because of their lack of experience with traditional banks, many African consumers feel more comfortable with informal financial services. For instance, of the 40 percent of sub-Saharan Africans who say they save money, about half do so through savings clubs, which go by different names in different countries (stokvels in South Africa, tontines in Senegal and Ivory Coast, and chilimba, metshelo, or chama in much of east Africa). Almost all of the sub-Saharan Africans who have loans have gotten them through friends or family. The equivalent of roughly $1 billion in remittances flows out of South Africa to other countries in the Southern African Development Community annually—with more than $650 million of that reaching recipients through informal channels, such as private agents or family and friends traveling between locations. That is a lot of bills to count out in villages in Zimbabwe, Malawi, and Swaziland.

    Rise in the Number of Bankable Sub-Saharan Africans

    Sub-Saharan Africans have many reasons to move away from these informal approaches, which are often suboptimal from an economic or security perspective. For instance, using informal agents to transfer money is certainly riskier and more expensive than using a money transfer operator such as Western Union or Bank of Africa Group. Paper currency in Africa can also be very bulky—in some cases requiring more than 50 notes to equate to a single note in U.S. or European currency—making it inconvenient and risky to carry around. And it’s hard to see how Africans are going to avail themselves of the higher-quality goods and more comfortable lifestyles that they want without an alternative to cash and without something approaching a modern system of credit.

    With the population in sub-Saharan Africa growing and becoming wealthier, the number of people aged 15 or older with an individual income of $500 or more per year will rise to more than 460 million in 2019. This trend is likely to strengthen as governments in sub-Saharan Africa increasingly focus on their education, health, and security systems—enhancing the state of well-being in their countries. (See The New Prosperity: Strategies for Improving Well-Being in Sub-Saharan Africa, BCG report, May 2013.)

    According to The Boston Consulting Group’s estimates, there will also be some 400 million unique mobile-phone subscribers in 2019 and almost 150 million traditionally banked sub-Saharan Africans. (See Exhibit 2.) That will leave some 250 million people aged 15 or older who have an income of $500 or more and a mobile phone but no traditional bank account. This gives a sense of the potential market for mobile financial services.

    exhibit
    High Levels of Mobile Penetration

    Although sub-Saharan Africans do not have much exposure to formal financial services, they make extensive use of mobile technology. BCG’s analysis shows that more than half of all people in sub-Saharan Africa aged 15 or older have a mobile-phone subscription—more than twice the number of people who have an account at a formal financial institution.

    Considering their reliance on mobile phones and their lack of experience with formal financial institutions, it is probably no surprise that Africans are among the world’s most enthusiastic early adopters of mobile financial services. Eight of the ten countries that make the most use of mobile financial services are in Africa. (See Exhibit 3.) Use is particularly high in sub-Saharan Africa, which is the region with the highest number of registered mobile-financial-service accounts in the world (98 million as of 2012, compared with 36 million in the Middle East and North Africa; South Asia also had 36 million) and the highest proportion of active accounts (43 percent). Sub-Saharan Africa also has a far higher proportion of active accounts than other regions.

    exhibit

    But when you look a little deeper, it becomes apparent that the mobile-financial-service market in Africa is not as advanced as some might think. Around the world, there are roughly 200 mobile-money services but only a dozen have more than 1 million users, and the mobile-money market in sub-Saharan Africa is equally fragmented. (The one exception is Kenya, where a unique set of circumstances has enabled m-pesa to reach critical mass and become the dominant service; see the sidebar “The Secret to M-Pesa’s Success.”) In most parts of sub-Saharan Africa, people pick from among a number of platforms, which are typically not interoperable (meaning that someone using one mobile wallet might not be able to send cash to someone using another, and vice versa) and which do not pay interest on, or guarantee, the money that is “deposited” in them.

    THE SECRET TO M-PESA'S SUCCESS

    It’s good to be smart. But it’s even better to be lucky.

    M-pesa, the only breakaway success in Africa’s mobile-financial-service sector so far, had the incalculable advantage of government support. Early on, the Kenyan government said it would use m-pesa to make payments to Kenyan citizens, providing an alternative to a cumbersome system in which Kenyans had to cash government checks at the post office. And because m-pesa was going to benefit the Kenyan government directly, the government decided to remove one of the obstacles that might have impeded the service, allowing m-pesa to operate outside the provisions of banking law.

    On top of what was effectively a birthright, Safaricom, the MNO that started m-pesa, made a smart call in turning remittances, which are hugely important in Kenya, into one of the first use cases outside of government payments. Safaricom also did a good job of building customer trust and adding agents that could sign people up for service all over the country.

    As a result of these advantages, m-pesa has grown to serve 17 million customers—almost two in every five Kenyans use it. M-pesa’s revenue growth averaged more than 42 percent annually from 2010 through 2013; it now generates more than a quarter of a billion dollars in revenues per year.

    M-pesa’s success has caught the attention of banks and mobile operators all over sub-Saharan Africa. But to see m-pesa as a template that can be applied elsewhere is to miss the special enablers of its success, especially the part played by a friendly government.

    Indeed, at this point, m-pesa poses some risks to Kenya. The first risk is the sheer volume of payments flowing through the system—without the consumer protections that a true mobile-banking system would offer. And with so much of Kenya’s GDP now changing hands over m-pesa, government officials may understandably be concerned about the fact that m-pesa is partly a foreign entity. (In 2000, the UK company Vodaphone acquired a 40 percent stake in Safaricom.)

    Safaricom tried to replicate the success of m-pesa in South Africa. But given the tougher regulatory environment there than in Kenya, the absence of any dedicated m-pesa agents, and the less advantageous remittance market, the original release of the service failed to take off. M-pesa hasn’t given up in South Africa; in mid-2014, it introduced a revamped version of the service that it hopes will be more successful.

    Further, most of the services are led by MNOs and most of the transaction software is built atop MNO billing systems, meaning that the services lack the rudiments of mature banks’ transaction systems, including security, leaving them vulnerable to misuse and regulatory intervention as they reach more and more customers.
    A $1.5 Billion Revenue Opportunity by 2019

    For the moment, sub-Saharan Africans use mobile financial services to make payments. Generally, they are urban workers sending money back to family members in rural areas or people using their phones to purchase more airtime or to prepay for electricity or water in their homes. These basic payment activities will continue to account for most of the region’s mobile-money usage for the next few years. We estimate that in and of themselves, these payment activities—along with deposit income—could produce up to $1.5 billion in fees for mobile-financial-service providers in sub-Saharan Africa in 2019.

    And other new sources of revenue are likely, as Africans look for more-efficient ways to handle their financial transactions. Microloans are a good example of an area in which a mobile financial service could position itself as a trusted alternative, especially in places where the best current option is a local informal moneylender. Savings are another area of promise, with the selling point being the ease—and security—of being able to save by keying in a few commands on a mobile phone versus depositing money with a stokvel, tontine, or chilimba. Some sub-Saharan Africans don’t even use these community-based savings vehicles; they just keep any extra money they may have in their homes, under the proverbial mattress.

    As Africans’ incomes increase, there will also be opportunities to give them access to other financial products, such as mortgages and insurance. People in Africa have traditionally spent very little on insurance, but that may be changing; a recent survey by BCG showed that Africans planned to increase their spending on insurance by an average of 21 percent in the ensuing 12 months; Ghanaians and Kenyans planned to increase their insurance spending by considerably more. (See Exhibit 4.) (For more information, see Understanding Consumers in the “Many Africas,” BCG Focus, March 2014.)

    exhibit

    Compulsory auto insurance is one reason for the increase, but some Africans are starting to see the benefits of other forms of insurance. Express Life in Ghana, which was bought in 2013 by UK insurance giant Prudential Financial, gives Ghanaians access to health and life insurance as well as funeral coverage. The premiums can be as low as 2.6 Ghanaian cedi per month (about 70 U.S. cents), and many customers pay the premiums using their mobile phones.

    Then there is the opportunity to mine transactional data. As mobile financial services are more widely adopted, they will generate a significant amount of data that will be of use to financial institutions. The activity logs of hundreds of thousands of users in a given African country can be mined—using big data techniques—to understand what these users do with their mobile financial services and what other services they might be interested in. Financial companies can use the information that’s generated in their core processes or sell it to third parties such as credit bureaus, provided that they stay within privacy laws.

    Another industry segment that could benefit from the rise of mobile financial services is retail. Daily shopping in Africa is mostly done through cash transactions at street markets and kiosks; the owners of these mom-and-pop shops end up carrying a lot of cash—and being vulnerable to theft. The driver of a truck that distributes soft drinks or confectionery products to African markets may likewise end up with a lot of cash and the same vulnerability. If these transactions could be done using a mobile financial service, the security risk would drop significantly. Mobile financial services could likewise help manufacturers of fast-moving consumer goods—and the larger retail chains that are starting to enter the African market—get a better handle on cash management and on their working capital.